Blackstone IPO offers fine print

Tax implications, little control face unit holders

By

SteveGelsi

NEW YORK (MarketWatch) -- While the Blackstone Group LP's upcoming $4 billion initial public offering gets hyped as one of the richest offerings ever seen in the United States, it's also offering some fine print for individuals to consider at tax time.

Stock shoppers eying Blackstone should also take note that they won't have much say in how the firm is run, since the private-equity manager will only sell a small stake of its management operation to the public. See full story.

Once the IPO begins trading, possibly in about six to 12 weeks, Blackstone will begin paying out partnership income to its unit holders based on the management of its whopping $78.7 billion portfolio of companies and other investments.

That income will be summarized in K-1 tax forms, which must then be included in annual tax disclosures to the IRS.

Deep in its IPO prospectus, Blackstone warns that it will most likely require longer than 90 days after the end of its fiscal year to obtain the information from its lower-tier entities so that K-1s may be prepared.

The Blackstone IPO 'runs counter to the mindset you're used to -- that private equity-guys like to keep their affairs private.'
Jim Abbott, Seward Kissel

"Consequently, holders of common units who are U.S. taxpayers should anticipate the need to file annually with the IRS (and certain states) a request for an extension past April 15 or the otherwise applicable due date of their income tax return for the taxable year," according to the firm.

Still, market watchers point out that Blackstone is generating excitement as the first U.S. IPO from a major private-equity firm's management business and for that reason people will invest in it, despite a lack of control that unit holders will have.

"Common unit holders do not elect our general partner or vote on our general partner's directors and will have limited ability to influence decisions regarding our business," Blackstone said in its IPO filing.

"The investors in this deal will have no say" in the company, commented one person familiar with the deal. "You'll be saying, 'I trust these guys to make me a lot of money.'"

Malon Wilkus, chief executive of American Capital Strategies
ACAS
and a rival of Blackstone's in the world of alternative asset investing, said that the IPO will present "complications" to retail shareholders via the tax issues.

Blackstone "has decided to do this in a way that really doesn't make it entirely shareholder-friendly," Wilkus added.

In another break from other public companies -- although not unheard of nowadays -- Blackstone won't provide specific net-income projections to Wall Street analysts.

"Because our businesses can vary in significant and unpredictable ways from quarter to quarter and year to year, we do not plan to provide guidance regarding our expected quarterly and annual operating results to investors or analysts after we become a public company," the filing said.

Jim Abbott, partner of law firm Seward Kissel, said some speculate that the Blackstone IPO could signal a peak in the private-equity cycle, but he maintains that the business remains strong.

The Blackstone IPO "runs counter to the mindset you're used to -- that private equity-guys like to keep their affairs private," he said. "Blackstone has done some of the bigger newsworthy transactions of late. Major equity sponsors doing something like this will create a buzz."

While major hedge-fund IPOs such as Fortress Investment Group's
FIG, -0.09%
and Blackstone's are possible, only a few are big enough to move ahead with a listing.

"Any firm that would do an IPO of this sort has to be fairly large and institutionalized," Abbott asserted. "That excludes a lot of possibilities. And some portion of those won't want to do it, because they like being private and they don't want people to know how much money they make."

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